Capital maintenance: A neglected notion

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The Accounting Historians Journal Vol. 14, No. 2 Fall 1987
Oscar S. Gellein RETIRED MEMBER, FINANCIAL ACCOUNTING STANDARDS BOARD
CAPITAL MAINTENANCE: A NEGLECTED NOTION
Abstract: This paper traces in descriptive fashion some of the developments of thought about capital maintenance during this century. The adverse consequences of neglecting the subject are mentioned after a basic review of the concepts. Contrasts among the theories from the United Kingdom and Ireland, Canada, Au-stralia and other countries are also made.
Introduction
To have income is to have an increment of capital; to have a loss is to have lost some capital. Capital maintenance and income are interdependent building blocks of financial ac-counting. All other notions either derive from or build on those foundation stones. Despite that mutual dependency, they have not had equal attention in the development of financial re-porting in the United States. Neglect of capital maintenance in the development of income theory has not been without pen-alty to financial reporting. This paper traces some develop-ments of thought about capital maintenance during the twen-tieth century. The paper is largely descriptive of the issues. Attention is not directed to strengths and weaknesses of argu-ments that have been made about the issues. Sterling et al [1981] have done that well. Some brief comments are made about adverse consequences of the neglect of capital mainte-nance.
Some simple thoughts about capital maintenance and in-come are offered first. The substance of financial accounting for a business enterprise concerns investment in assets looking towards a return of and on the investment. Investment in that sense refers to the act of giving up assets in exchange for other assets to be used in producing a return on the investment. Return of the investment refers to the receipt of assets equiv-alent to the assets relinquished in making the investment. Return on the investment is income, that is, the receipt of assets in excess of the return of investment.
Capital maintenance concerns the division of the aggregate return into its two components: return of and on investment.